Britain's top shares fell 0.8 percent on Thursday after the Bank of England (BoE) kept interest rates on hold, but Sainsbury triumphed over the gloom thanks to an upbeat trading update. The FTSE 100 ended down 50 points at 6,222.7.
The index traded higher ahead of the BoE decision, as Sainsbury's brought joy to a downbeat retail sector by meeting analysts' expectations and saying like-for-like sales excluding fuel rose 3.7 percent in the third quarter. Sainsbury topped the gainers, rising 6.3 percent, while Kingfisher rose 3.7 percent.
In contrast, Marks & Spencer dropped 3.5 percent, adding to an 18.7 percent fall in the previous session when the retailer reported its worst quarterly performance in two years. The BoE held borrowing costs steady at 5.5 percent, but analysts expect the Monetary Policy Committee (MPC) will follow up December's quarter percentage point cut with another next month.
Most economists had expected the central bank to keep rates steady this week, but markets had priced in as much as a 60 percent chance of a back-to-back cut. "I don't think this changes the outlook for interest rates and I don't think necessarily that the Bank of England is in the mood to disappoint the rate-expectations, at least in the near-term, that the market's priced in," said Neil Parker, a market strategist at Royal Bank of Scotland.
He added the BoE will almost certainly cut rates to 5.25 percent in February, followed by another cut in April or May. Also on Thursday, the ECB left interest rates unchanged at 4 percent, but President Jean-Claude Trichet said policy is not neutral and the ECB is ready to take pre-emptive action against inflation if needed.
Banks robbed 19 points off the index, with Royal Bank of Scotland down 2 percent, HSBC slipping 1.7 percent and Barclays losing 1.3 percent. Northern Rock shed 4.5 percent. The ailing British bank is likely to have borrowed about 1.4 billion pounds ($2.74 billion) from the BoE in the past week, data from the central bank showed.
Bradford & Bingley, which lost 3.5 percent, denied market rumours it had gone to the BoE for emergency funding. Heavyweight oil stocks weighed on the index as US crude oil fell. Oil prices lost $2 to stand below $94 a barrel as concerns about a wider economic slowdown raised the possibility of weakening energy demand.
BP was down 0.9 percent, and Royal Dutch Shell shed 1.3 percent. Some traditionally defensive sectors such as electricity, utilities and tobacco climbed, however, as investors sought a safe haven in a rocky market. Tobacco stocks Imperial Tobacco and British American Tobacco added 3.3 and 2.1 percent respectively.
"It's going to feel painful this year for the UK economy as a whole, as for consumers, as for businesses - because growth is going to be slower than it has been - but we don't predict a recession," Royal Bank of Scotland's Parker said.